Home Investment Ad Tech M&A Fell Off A Cliff In Q1 – And Not Just Because Of COVID-19

Ad Tech M&A Fell Off A Cliff In Q1 – And Not Just Because Of COVID-19

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It was a chilly Q1 for ad tech deal-making, and you can expect more of the same in the second quarter. But you can’t blame it all on COVID-19 – at least not entirely.

The ongoing health crisis is only accelerating trends that were already rolling, said Terry Kawaja, CEO and founder of investment bank LUMA Partners, which released its Q1 2020 market report on Tuesday.

Around 75% of ad tech businesses at large will fail outright, while another 20% desperately seek an exit for their distressed and often undifferentiated tech. The remaining roughly 5% of ad tech companies will achieve strategic exits at valuations that actually provide materially positive returns to investors.

That was true before the coronavirus hit and will remain true when the pandemic finally ends.

“The impact of COVID-19 doesn’t mean that your strategic needs change or go away and, in some cases, this is even accelerating the need for whatever that strategy is,” said Conor McKenna, a VP at LUMA.

Still, most buyers are understandably delaying deals in progress while they wait for the dust to settle, and they’re certainly holding off on initiating anything new in the short term.

The numbers are stark.

Deal activity in the ad tech sector dropped by 50% on both a quarter-over-quarter and year-over-year basis. In fact, Q1 was the slowest quarter for M&A since LUMA started producing its market reports in 2015.

Despite the striking slowdown in M&A, however, a few notable deals did close during the quarter, with identity and connected TV as bright spots for activity, as they’ve been in the past.

In particular, Comcast’s acquisition of Xumo in February and Fox Corporation’s acquisition of Tubi in March both seem quite prescient considering how much more people are streaming now that they’re sheltering at home due to the coronavirus.

But networks buying ad-supported video on-demand platforms would have been a clever – and strategic – move regardless of what’s happening with consumption right now.

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“They’re following the consumer and, to a large extent, consumers have already converged,” McKenna said. “The current circumstances and environment obviously accelerate it that much further, but it was smart no matter what.”

What’s going to happen in Q3 and beyond? M&A is a function of confidence, and at “times like this it’s hard to garner a lot of confidence about what the future looks like,” Kawaja said.

The crystal ball is murky. What makes this situation different from the previous financial crisis, at least, is that buyers are still itching to get deals done, they’re just waiting for the uncertainty to clear. Kawaja and team have fielded numerous calls from buyers over the past few weeks who affirmed that they have every intent of getting back in the game … when normality returns.

“In other corrections you didn’t have smart deal-makers ruminating at home about things they could do,” McKenna said. “As people get used to the new normal, smart players will be thinking about opportunities and building relationships – and all of this will be happening far sooner than when it comes out in the public eye.”

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